Average True Range – ATR

By on October 28, 2012

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Indicator of market volatility is Average True Range, ATR. Welles Wilder has firstly presented this concept in the book “New concepts in technical trading systems”. Afterwards this indicator is applied as one of other components of trading systems and indicators.

Often during the price fall, caused by the abundant sales, Average True Range reaches very high rates. During the horizontal movement, indicator is at the low level, it often occurs during consolidation at the top point of the market. It is determined by the same rules as other volatility indicators. The lower the indicator rate, the more probable the fact that trend direction will weaken, and vice versa, the higher the indicator rate, the more probable the fact that trend will reverse: this is the method of forecasting using Average True Range.

Calculation

True Range is the greatest of the following three values:

– difference between the current maximum and minimum (high and low);

– difference between the previous closing price and the current maximum;

– difference between the previous closing price and the current minimum.

The indicator of Average True Range is a moving average of values of the true range.